Profit has several meanings in A-Level Economics, and the exam rewards the one that fits the question. This page covers normal and abnormal profit, accounting and economic profit, and the shut-down rule in the short and long run.
Why do firms that lose money keep trading, while some profitable ones shut plants?
Profit is total revenue minus total costs. Economic costs include normal profit, the minimum return that keeps the owner in the market, so economic profit above zero is abnormal profit. In the short run a firm shuts down when price falls below average variable cost. In the long run it exits when price falls below average cost.
Profit is the reward left after a firm has paid its costs. At A-Level the word needs a label, because different labels give different numbers.
Accounting profit is total revenue minus explicit costs. Explicit costs are the payments a firm actually makes, such as wages, rent and materials.
Economic profit is total revenue minus explicit costs and implicit costs. Implicit costs are the opportunity costs of resources the owner already holds, such as their own time and money.
Illustrative figures: a café owner earns revenue of £120,000 and pays explicit costs of £100,000. They gave up a £30,000 salary elsewhere. Accounting profit is £20,000. Economic profit is −£10,000, because the owner would have been better off employed.
Normal profit is the minimum return needed to keep the entrepreneur in this line of business. It is a cost, so it sits inside the AC curve.
A firm earning normal profit has zero economic profit. It is at break-even, where TR = TC and AR = AC.
Abnormal profit (also called supernormal profit) is any profit above normal profit, so AR is above AC. Sub-normal profit is a return below normal, so AR is below AC.
A firm that wants to maximise profit produces where marginal cost (MC) equals marginal revenue (MR), with MC cutting MR from below. It then compares price with average cost at that output.
Figure 1 shows a price-taking firm, so AR = MR. The left panel shows abnormal profit. The right panel shows a loss that is worth bearing in the short run.
At price P1 the firm produces Q1, where MC = MR. AR is above AC at Q1, so the shaded rectangle (P1 minus AC, times Q1) is abnormal profit.
At price P2 the firm produces Q2. AR is below AC, so there is a loss. AR is above average variable cost (AVC), so revenue covers all variable costs and part of the fixed costs.
Fixed costs are paid whether or not the firm produces, so they should not drive the decision. If the firm shut down, it would lose the whole fixed cost. By staying open it loses less.
The shut-down point is the lowest point of the AVC curve. Below that price, every unit produced adds more to cost than to revenue.
Abnormal profit attracts new firms where entry is easy. Supply rises, price falls, and profit is competed back to normal. Persistent losses push firms out until the survivors earn normal profit.
Where barriers to entry are high, abnormal profit can last. This is why profit connects to monopoly power and competition policy.
A firm's choice to stay or go depends on several things. Each one is a ready evaluation point.
Real accounts show the measurement issue. In the year to February 2026 Tesco reported statutory operating profit of £2,985m, and adjusted operating profit of £3.15bn on a 52-week comparable basis.[1] The adjusted figure leaves out items judged unusual by size and nature, so it is a different definition.[2]
Exit decisions show the long-run rule. Petroineos said in 2024 that it expected a loss of £150 million at the Grangemouth refinery, and it stopped processing crude oil there in April 2025.[4][5] The company said larger, modern sites abroad had made the plant structurally unprofitable.[5] Note that the loss figure is the owner's own claim.
The economics is the same on every board; the question format is what changes. Most questions on this topic take one of six shapes. Open each to see how the topic appears in it and what earns the marks. All questions here are original Curriculum Circle practice questions, not board questions.
On this topicVery common. Questions test the difference between accounting and economic profit, and which cost curve sets the shut-down point.
What earns the marksAO1 for the definitions, and AO2 when a short set of figures must be applied.
CC practice questionIllustrative figures: a firm has revenue of £500,000 and explicit costs of £420,000. The owner gave up a £100,000 job. Which is correct? A: accounting profit £80,000, economic loss £20,000. B: accounting profit £80,000, economic profit £80,000. C: accounting loss £20,000, economic profit £80,000. D: accounting profit £180,000, economic profit £80,000. [1 mark]
On this topicCommon. Students calculate profit from (AR − AC) × Q, or decide whether a firm should stay open using AVC.
What earns the marksAO1 for the formula and AO2 for applying it, then a short interpretation.
CC practice questionIllustrative figures: a price-taking firm sells 500 units at £12. Average cost is £14 and average variable cost is £9. Calculate the loss and explain whether the firm should continue in the short run. [4 marks]
On this topicCommon. Typical prompts ask why normal profit is a cost, or why a loss-making firm may keep trading.
What earns the marksAO1 for the definition, AO2 for context and AO3 for a short chain of reasoning.
CC practice questionExplain why a firm earning only normal profit may be willing to stay in an industry. [6 marks]
On this topicCommon. A cost and revenue diagram is expected, with a shaded profit or loss area and a clear statement of the time period.
What earns the marksAO2 for using the data or context and AO3 for a developed, diagram-supported chain.
CC practice questionUsing a diagram, analyse why a firm making a loss in the short run may continue to produce. [9 marks]
On this topicFairly common, usually inside a data or extract question about a closure, a profit announcement or a price war.
What earns the marksAO1 to AO4, weighted to AO3 and AO4, with a judgement that uses the time period and the cost structure.
CC practice questionEvaluate whether the closure of a loss-making plant is always the right decision for a firm. [12 marks]
On this topicAppears as part of a wider question on firm objectives, market structure or competition policy rather than alone.
What earns the marksAO1 to AO4. The top band is decided by an AO4 judgement that weighs the time period, entry barriers and objectives.
CC practice questionAssess whether abnormal profit is always a sign that a market is working badly. [25 marks]
| Weight | What it is | What it means on profit | |
|---|---|---|---|
| AO1 | 20–23% | Knowledge and understanding of terms, concepts, theories and models | Define accounting, economic, normal and abnormal profit precisely, and state the shut-down rules for each time period. |
| AO2 | 26–29% | Application to economic contexts | Apply the terms to the firm in the case, for example by reading AVC and AC from given data or by naming the implicit costs in the scenario. |
| AO3 | 26–29% | Analysis of issues and their impact on economic agents | Build chains such as: price below AC means a loss, so firms leave in the long run, so supply falls and price rises. |
| AO4 | 22–25% | Evaluation, using evidence to reach a judgement | Judge whether the decision depends on the time period, expectations, sunk costs and objectives, then reach a supported conclusion. |
Weightings are approximate and taken from the AQA A-level Economics 7136 specification [0]. Edexcel and IAL weight the objectives differently, but they test the same four skills.
Assess whether a firm making a loss should always stop producing. [25 marks]
In the short run some costs are fixed, so the firm pays them whether it produces or not. If price is above AVC, each unit earns a contribution to those fixed costs, so producing loses less than closing.
If price falls below AVC, each unit adds more to cost than to revenue, so the loss grows with output. The firm should stop, because stopping caps the loss at the fixed costs.
In the long run all costs are variable. If price stays below AC, the firm cannot earn normal profit, so it should exit. When firms leave, supply falls and price rises, so the remaining firms return to normal profit.
The rule depends on the time period and on whether the fall in price is temporary. A firm that expects recovery may accept short-run losses, because restarting is costly. A firm facing a permanent cost disadvantage has no such reason to wait.
Sunk costs and other objectives also matter. A firm may keep a loss-making plant to protect market share or to avoid redundancy costs. In 2025 Grangemouth shows the long-run case, because the owner judged the plant structurally unprofitable and closed it.[5] I judge that a firm should stop producing only when price is below AVC in the short run, or when price is expected to stay below AC in the long run. Outside those cases, the decision depends on expectations about price.
In the year to February 2026 Tesco reported statutory operating profit of £2,985m, and adjusted operating profit of £3.15bn on a 52-week comparable basis.[1] Tesco excludes adjusting items because of their size and nature, so the two figures use different definitions of profit.[2]
In 2025/26 Tesco's UK and Ireland retail business earned an adjusted operating margin of 4.7%.[3] The accounts alone cannot show whether that is abnormal profit, because the answer depends on the return investors could earn elsewhere.
In 2024 Petroineos said it expected a £150 million loss at the Grangemouth refinery in Scotland.[4] It stopped processing crude oil there on 29 April 2025, and said large foreign competitors had left the 100-year-old plant structurally unprofitable.[5]
Everything above is the topic page. The pieces below take it further. Each one trains a particular assessment objective rather than covering the topic again, and they are added over the year.
Figures and facts were checked against these sources on 2 November 2026. Worked numbers labelled "Illustrative figures" are invented for teaching.
The CC Economics revision platform drills profit diagrams and shut-down questions, and the Inner Academy covers the topic in recorded lessons.
See the Economics platformThe Inner Academy